Investment Association issues stern warning to kitchen sink companies
The Investment Association late last week fired a warning shot to companies which rejig their profit forecasts as soon as a new management team is appointed, essentially washing the business' value down the drain.
The association, which represents unit trust and investment fund managers, has issued a letter to chairmen at FTSE 350 companies, telling them that they will be warning members in the future when non-executive directors who have been involved in such activities, dubbed "kitchen-sinking", are up for re-election.
The Investment Association noted that it was concerned about the frequency that such reevaluations of a company's assets or potential profits were taking place, particularly as it often results in a sharp drop in share price while the reasons for such reassessments were usually evident for quite some time.
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In light of its concerns, the association's corporate governance research unit, IVIS, will be issuing an amber top alert for the re-election of those non-executive directors who have been involved in such activities for AGMs taking place on 1 August onwards.
Amber top warnings are used to highlight concerns which IVIS feels are a significant issue to consider and is the unit's second-most stern alert after its red top warnings.
The letter also highlighted the importance of companies' management teams not behaving in a short-term manner, and to be regularly considering the long-term profitability and performance of their firm. However, the Investment Association has not singled out any companies which it is particularly concerned about.
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The timing of the Investment Association's letter is likely to make many firms sit up and listen. This AGM season has been particularly heated, with resolutions relating to pay being shot down at BP and Weir Group, while Man Group and Anglo American only narrowly managed to get their pay resolutions passed.
Meanwhile, a report released earlier this month by Tomorrow's Company warned that companies' collective continued short-sightedness had lead to many failing to invest or get the best out of their staff.